A Simple Way to Plan Your Nest Egg

Ever wonder how much money you’ll need to preserve your lifestyle during retirement? Many financial professionals use a benchmark of 70% to 100% of your current income to maintain your lifestyle during your non-working retirement years.

For simplicity’s sake, let’s say you’re aiming for a 20-year retirement (the standard calculation as we live longer, healthier lives) at 100% of your current spending level. A few uncomplicated steps can give you a rough estimate of how much money you’ll need for your nest egg, where it will come from and whether your portfolio is on track.

Calculate annual spending. Deduct your annual savings from your current income. Since this is only a rough estimate, use pretax figures. If you earn $150,000 and save $30,000 a year, you’re spending $120,000 a year and that’s what you need to take in to maintain your current lifestyle.

Factor in Social Security. Estimate your benefits. If you’ve made the maximum contribution for Social Security during most of your working career, you’ll receive around $20,000 a year at age 65, or about $16,000 if you retire at 62. If you’re married and one of you has a larger lifetime income, the other spouse will get 50 percent of the larger benefit. The Social Security Administration (SSA) regularly mails estimates of current and projected benefits to all working Americans over 25 who have contributed to Social Security. If you haven’t received this statement, ask the SSA for it.

Compute additional income. Add up other money you expect to take in from a pension, investment property rentals or part-time consulting work.

Let’s say you and your spouse are the same age and you want to retire at 62. But one of you earned most of the income. At 62, you could retire with total Social Security benefits of around $24,000. That means you need another $96,000 a year to get to your $120,000 target.

Assuming you expect to generate that extra income solely from your portfolio, multiply $96,000 by 20 years and you get a $1.92 million target (rounded up to $2 million) for your nest egg. You can tap that portfolio for $100,000, or 5%, each year of your retirement.

If your retirement lasts longer, remember that you will be earning money on the balance in your portfolio.

Don’t forget to account for inflation. If you needed only $25,000 a year, over 20 years that will more than double if inflation accelerates at an average annual pace of 4%.

To maintain the 5% annual drain on your portfolio and account for the eroding effects of inflation, your portfolio needs to be growing between at least 8% and 9% a year. And if you spend more than the allocated 5%, you’ll lose purchasing power over the long-term.

One Unknown Issue

How much will your expenses change? Travel and leisure spending are likely to increase, while commuting and clothing costs will decline. If you retire early, health insurance costs will probably rise until Medicare kicks in at age 65 years.

Remember, these calculations give you only a rough estimate of your needs. And they don’t factor in taxes. You may be in a lower tax bracket once you’re no longer collecting a paycheck.

Consult with your financial advisor for a more detailed projection to help insure your retirement years will be golden.